Day trading can be very profitable. However, day trading taxes can be quite different depending on if you are trading stocks, commodities, or futures. All day trading profits from stocks are treated as ordinary income and taxed the same as ordinary income. And, unless you obtain trader tax status with the IRS, the losses that you can deduct from your profits before paying taxes are capped at $3,000, $1,500 if you are married and filling separately. However, both commodity and futures day trading are taxed differently. By using what is called a mixed straddle election, day trading taxes on commodities and futures are 60% at the rate for long term capital gains and 40% at the rate for short term capital gains which is the ordinary income rate. And, with futures and commodities in this case your losses are not capped at $3,000 but rather you are taxed on your net profit.

Day Trading and Taxes

Even though the income that you earn trading securities as a day trader may be your only income, the IRS does not consider this to be “earned income” for tax purposes. The good part is that you will not need to pay self-employment taxes of 15.3% on income earned as a day trader. The downside is that if you only work as a day trader for years and years, you will not have paid into Social Security and may not have built up the necessary 40 credits needed to collect Social Security payments when you retire. And, for that matter, if you pay in very little to Social Security over the years, your monthly benefits in retirement will be very small.

Day Trading and Taxes

Day Trading Tax Rate

Your day trading tax rate for stocks, commodities, and futures will depend on your status with the IRS. Long term capital gains are taxed at 15% currently. When you are reporting capital gains on stocks, make certain to keep track separately of investment income of this sort and your day trading gains and losses. Because short term capital gains are taxed at the rate of ordinary income, this can be quite low if you are not making much money and can go as high as 39.6% for folks making more than $418,000 a year. The day trading tax rate is 10% for taxable income up to $9,325, 15% for $9,326 to $37,950, 25% for $37,951 to $91, 900, and 28% for $91,901 to $191,680. Stock trading profits are subject to short term rates unless you elect for trader tax status while commodities and futures enjoy the 60/40 split of long term/short term as well as no cap on losses.

Day Trading Capital Gains Tax

Capital gains taxes are levied on profits. In the non-trading world, you can generally deduct your investment losses from your gains before calculating your taxes. Unfortunately, in the world of day trading of stocks you can only deduct $3,000 of your losses and if you are married and filing separately you can only deduct $1,500 of your losses before calculating your day trading capital gains tax. The bottom line of our discussion about day trading taxes is that when you are trading stocks you need to keep track of your taxes and consider taxes along with commissions and fees as part of the cost of day trading. Fortunately, with commodities and futures, you only need to concern yourself with net profit. And, with commodities and futures you benefit from paying long term capital gains rates on 60% of your profits without any cap on losses.

Tax on Day Trading Profits

Can you change the tax on day trading profits? If you trade thirty or more hours a week and do intraday trades four or five times a day on the average throughout the year you can apply with the IRS for designation for Trader Tax Status. If the IRS grants you this tax status you will be able to report income from trading and liabilities on Schedule C as business expenses which can include losses and home office expenses.  In order to deduct your losses when you have Trader Tax Status you need to make an election to be a mark to market trader and must do so on April 15 of the previous year. Not only does such an election get rid of the $3,000 for stocks but it allows a much wider range of business deductions.

Tax on Day Trading Profits

Day Trading Tax Rules

Thus, it is important for anyone interested in day trading to learn the day trading tax rules that apply to the amount of trading that you intend to do and to day trading of stocks, commodities, or futures. If you only day trade from time to time and are not running up thousands of dollars in losses time and time again, you won’t have to worry about the $3,000 cutoff for deducting losses with stocks but you still ought to think about the fact that all of your profits are treated a short term capital gains unlike the 40/60 treatment of commodities and futures.. And, of course, if you don’t make four to five intraday trades a day and work thirty or more hours a day at day trading, you won’t qualify for trader tax status anyway.

Day Trading Tax Calculator

If you are an active day trader, you may be in and out of stock trades all day long. How do you keep track of profits and losses on each and every trade? You need a day trading tax calculator that tracks each and every trade that you make throughout the year. In fact, since you are not having taxes deducted from a paycheck, you will need to make quarterly tax payments on your profits. Aside from amount of money involved in paying taxes, those interested in day trading need to consider the amount of work involved when deciding if day trading is the career they want to pursue.

Tax Implications of Day Trading

To be success at day trading you need to first learn a set of skills that allows you to quickly spot and execute trades to make money. You need to devote sufficient time to the effort to make it profitable. And, once you get going, there will always be winning and losing trades. Here is where the tax implications of day trading come into play. When your stock trading losses exceed $3,000 a year it might be a good idea to seek trader tax status so that you can deduct losses in excess of $3,000 a year as well as other expenses of your business as a day trader. Or, you may simply want to chat with us at to learn about the tax and other benefits of trading commodities and futures.

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